Description

James River Coal Senior Notes 9.375% due 2012 with a change of control of put.

For more detailed discussion on JRCC equity please see the idea originally posted by Pirate681. This is not a recommendation to buy the common but the senior notes which at 85 have a ytm of 13.3%.

I realize this not a home run but there are scenarios in which our realized annualized return would exceed that 13% figure. Consider the 13% a base-case annualized return which is not all that bad in today's world.

In the debate over JRCC common it was estimated that the common shares could be worth over $50 based on earnings potential and the then-traded multiples of competitors. Since then spot coal prices have fallen from $55 to the mid $30s (QZ1 on your Bloomberg) and earnings have evaporated. In the meantime, the company's biggest proponent, Pirate Capital, likely along with all its me-too tagalongs, has sold down its stake. My guess is that they are about completely out of it now. The stock chart reflects that mass liquidation with the price having declined 50% over just the past three months.

The company has relatively little legacy obligations and has drawn about 20mn on its revolver. The company's only other financial debt obligation is its 150mn senior debt issue. In terms of reserves, the company has about 270mn tonnes of coal reserves, 230mn of which is Central Appalachian. To sum up non-financial obligations (pensions, black-lung, etc) total $115mn, revolver 20mn, and senior debt 130mn (market value) for a total of 265mn, or less than $1 per ton of reserves. There hasn't been a transaction at less than $1 per ton in a long time and unless spot coal falls back to $20 there likely won't be. The basic takeaway is that the company, though cash poor, is asset rich and that creditors (including of course the employees) are in pretty good shape. Bankers in this industry tend to lend off assets anyway so I think a bank-led filing is unlikely in the near term in which case you clip an 11% coupon yield while they sort out their problems.

The upside is that the bonds have a change of control put at 101. Should the company find a suitor the bonds would be called and your return would be higher than that implied by the YTM.

The risk is of course that the company has to file chapter 11 for some reason. In that case our bonds (being unsecured) will not accrue interest and also stand behind the employee interests (black lung etc).

Catalyst